Exam Questions Financial Position and Cash Flows Chapter 5 - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
CHAPTER 5
FINANCIAL POSITION AND CASH FLOWS
CHAPTER STUDY OBJECTIVES
1. Understand the statement of financial position and statement of cash flows from a business perspective. It is important to understand how users of financial statements use the SFP and the statement of cash flows. For example, potential investors in a company may use the SFP to analyze a company’s liquidity and solvency in order to assess the risk of investing. In addition, the SFP provides details about the company’s financial structure. Users may use a company’s statement of cash flows to assess its earnings quality and obtain information about its operating, investing, and financing activities.
2. Identify the uses and limitations of a statement of financial position. The SFP provides information about the nature and amounts of investments in enterprise resources, obligations to creditors, and the owners’ equity in net resources. The SFP contributes to financial reporting by providing a basis for (1) calculating rates of return, (2) evaluating the enterprise’s capital structure, and (3) assessing the enterprise’s liquidity, solvency, and financial flexibility. The limitations of an SFP are as follows: (1) The SFP often does not reflect current value, because accountants have adopted a historical cost basis in valuing and reporting many assets and liabilities. (2) Judgements and estimates must be used in preparing an SFP. In addition, entities often need to make materiality judgements when preparing financial statements. (3) The SFP leaves out many items that are of financial value to the business but cannot be recorded objectively, such as its human resources, customer base, and reputation.
3. Identify the major classifications of a statement of financial position. The SFP’s general elements are assets, liabilities, and equity. The major classifications within the SFP on the asset side are current assets; investments; property, plant, and equipment; intangible assets; and other assets. The major classifications of liabilities are current and long-term liabilities. In a corporation, owners’ equity classifications include share capital, contributed surplus, retained earnings, and accumulated other comprehensive income.
4. Prepare a classified statement of financial position. The most common format lists liabilities and shareholders’ equity directly below assets on the same page.
5. Identify statement of financial position information that requires supplemental disclosure. Five types of information are normally supplemental to account titles and amounts presented in the SFP. (1) Contingencies: Material events that have an uncertain outcome. (2) Accounting policies: Explanations of the valuation methods that are used or the basic assumptions that are made for inventory valuation, amortization methods, investments in subsidiaries, and so on. (3) Contractual obligations: Explanations of certain restrictions or covenants that are attached to specific assets or, more likely, to liabilities. (4) Additional information: Clarification by giving more detail about the composition of SFP items. (5) Subsequent events: Events that happen after the reporting period.
6. Identify major disclosure techniques for the statement of financial position. There are four methods of disclosing pertinent information in the SFP: (1) Parenthetical explanations: Additional information or description is often provided by giving explanations in parentheses that follow the item. (2) Notes: Notes are used to provide additional explanations and for descriptions that cannot be shown conveniently as parenthetical explanations. (3) Cross-reference and contra items: A direct relationship between an asset and a liability can be cross-referenced on the SFP. (4) Supporting schedules: Often a separate schedule is used to present more detailed information about certain assets or liabilities because the SFP provides just a single summary item.
7. Indicate the purpose and identify the content of the statement of cash flows. The main purpose of a statement of cash flows is to provide relevant information about an enterprise’s cash receipts and cash payments during a period. Reporting the sources, uses, and net increase or decrease in cash lets investors, creditors, and others know what is happening to a company’s most liquid resource. Cash receipts and cash payments during a period are classified in the statement of cash flows into three different activities: (1) Operating activities: Involve the cash effects of transactions that enter into the determination of net income. (2) Investing activities: Include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment. (3) Financing activities: Involve liability and owners’ equity items and include (a) obtaining capital from owners and providing them with a return on their investment and (b) borrowing money from creditors and repaying the amounts borrowed.
8. Prepare a statement of cash flows using the indirect and direct methods. This involves determining cash flow from operations by starting with net income and adjusting it for non-cash activities, such as changes in accounts receivable (and other current asset/liability) balances, depreciation, and gains/losses for the indirect method. It is important to look carefully at prior-year operating activities that might affect cash this year, such as cash collected this year from last year’s credit sales and cash spent this year for last year’s accrued expenses. The same types of adjustments are required to determine cash flow from operations under the direct method, but the groupings on the statement are different. The cash flows from investing and financing activities can then be determined by analyzing changes in SFP accounts and the cash account.
9. Understand the usefulness of the statement of cash flows. Creditors examine the statement of cash flows carefully when they are concerned about being repaid. The amount of net cash flow provided by operating activities in relation to the company’s liabilities is helpful in making this assessment. In addition, measures such as a free cash flow analysis provide creditors and shareholders with a better picture of the company’s financial flexibility.
10. Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation. Illustration 5.23 outlines the major differences in how both sets of standards account for and present items on the SFP and statement of cash flows. Both sets of standards largely require that the same SFP elements be presented. In addition, IFRS requires presentation of biological assets, fair value information, investment properties, and provisions. The statement of cash flow presentation requirements are similar. The IASB is also working on a General presentation and Disclosure (Primary Financial Statements) project with a goal of targeted improvements to the structure and content of primary financial statements such as the statement of financial position and statement of cash flows. A related Exposure Draft was published in December 2019.
11. Identify the major types of financial ratios and what they measure (Appendix 5A).
Ratios express the mathematical relationship between one quantity and another, in terms of a percentage, a rate, or a proportion. Liquidity ratios measure the short-term ability to pay maturing obligations. Activity ratios measure how effectively assets are being used. Profitability ratios measure an enterprise’s success or failure. Coverage ratios measure the degree of protection for long-term creditors and investors.
Multiple Choice QUESTIONS
Answer No. Description
b 1. Earnings quality
d 2. Analysis of the statement of financial position
a 3. Uses of the statement of financial position
d 4. Limitation of the balance sheet
d 5. Uses of the statement of financial position
b 6. Uses of the statement of financial position
c 7. Uses of the statement of financial position
d 8. Definition of solvency
a 9. Definition of financial flexibility
b 10. Risk of business failure
d 11. Limitations of the statement of financial position
c 12. Company liquidity
b 13. Off–balance sheet financing
d 14. Monetary assets
c 15. Monetary assets
b 16. Financial instruments
c 17. Non-monetary assets
b 18. Non-monetary assets
a 19. Financial instruments
c 20. Basis for classifying assets
d 21. Definition of operating cycle
a 22. Identification of current asset
d 23. Identification of non-current asset
c 24. Classification of securities
b 25. Intangible assets
c 26. Identification of current liabilities
d 27. Definition of working capital
b 28. Identification of working capital items
b 29. Definition of liabilities
a 30. Identification of long-term liabilities
d 31. Classification of equity section accounts
c 32. Classification of shareholders' equity
d 33. Current assets on the balance sheet
b 34. Value of receivables
c 35. Calculate total current assets
b 36. Calculate total current assets
d 37. Calculate total current liabilities
b 38. Calculate retained earnings balance
b 39. Calculate current and long-term liabilities
a 40. Intangibles
d 41. Calculate the cash conversion cycle
d 42. Supplemental disclosure
b 43. Supplemental disclosure
Answer No. Description
c 44. Summary of significant accounting policies
b 45. Supplemental disclosure
b 46. Supplemental disclosure
d 47. Methods of disclosure
d 48. Contra account
d 49. Accounting policies
a 50. Adjunct accounts
a 51. Adjunct accounts
c 52. Definition of statement of cash flows
a 53. Disclosure of revenue-producing activities on the statement of cash flows
b 54. Identify an investing activity
c 55. Identify a financing activity
a 56. Identify an investing activity
c 57. Statement of cash flows
b 58. Classification of investing activity
c 59. Classification of investing activity
a 60. Classification of operating activity
d 61. Classification of financing activity
b 62. Classification of investing activity
b 63. Classification of investing activity
c 64. Classification of financing activity
a 65. Preparation of statement of cash flows under indirect method
c 66. Cash flows from operating activities
d 67. Preparation of statement of cash flows under indirect method
c 68. Preparation of statement of cash flows under direct method
b 69. Preparation of statement of cash flows under direct method
c 70. Classification of operating activity
d 71. Cash flows from operating activities under the indirect method
a 72. Ending cash balance
b 73. Cash flows from investing activities
d 74. Cash flows from operating activities under the indirect method
a 75. Cash inflows and outflows related to operating activities
b 76. Cash debt coverage ratio
c 77. Current cash debt coverage ratio
d 78. Financial flexibility measure
c 79. Calculation of free cash flow
b 80. Financial flexibility
d 81. Current cash debt coverage ratio
a 82. Cash debt coverage ratio
d 83. Free cash flow
a 84. Disclosures under ASPE
c 85. Disclosures under IFRS
c 86. Reclassification of current debt
d 87. Special disclosure under IFRS
b 88. Listing of current assets
c 89. Reporting requirements for SFP
c 90. Primary Financial Statements Project
d 91. IASB Disclosure Initiative
b *92. Definition of activity ratios
c *93. Definition of solvency ratios
d *94. Definition of asset turnover
c *95. Calculate asset turnover ratio
a *96. Calculate debt to total assets
d *97. Calculate rate of return on assets
b *98 Calculate the gross profit margin
c *99. Financial or capital market risks
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item Description
E5-100 Earnings quality
E5-101 Creditworthiness; debt to total assets
E5-102 Liquidity, solvency, and financial flexibility
E5-103 Limitations of the statement of financial position
E5-104 IFRS Practice Statement 2
E5-105 Terminology
E5-106 Definitions
E5-107 Account classification
E5-108 Account classification
E5-109 Valuation of statement of financial position items
E5-110 Statement of financial position classifications
E5-111 Statement of financial position classifications
E5-112 Statement of financial position classifications
E5-113 Statement of financial position
E5-114 Statement of financial position presentation
E5-115 Subsequent events
E5-116 Contractual disclosures and ethical consideration
E5-117 Notes
E5-118 Disclosure techniques
E5-119 Statement of cash flows
E5-120 Statement of cash flows purpose and use
E5-121 Cash flows from operating activities – indirect method
E5-122 Cash flows from operating activities – indirect method
E5-123 Cash flows from operating activities – direct method
E5-124 Statement of cash flows ratios
E5-125 Calculation of free cash flow and ratio
*E5-126 Calculation of ratios
*E5-127 Interpretation of ratios
*E5-128 Calculation of ratios
*E5-129 Calculation of ratios
*This topic is dealt with in an Appendix to the chapter.
Item Description
P5-130 Statement of financial position format
P5-131 Statement of financial position presentation
P5-132 Calculation of ending retained earnings
P5-133 Partial statement of cash flows – direct method
P5-134 Statement of cash flows – direct method
P5-135 Statement of cash flows – indirect method
P5-136 Statement of cash flows – indirect method
P5-137 Statement of cash flows – direct method
P5-138 Statement of cash flows – indirect method
*P5-139 Calculation of ratios
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE QUESTIONS
1. When assessing earnings quality, financial analysts are concerned that management may attempt to manipulate information to make earnings appear better or worse than they really are. Which of the following would NOT suggest poor earnings quality?
a) reduction of the allowance for expected credit losses
b) consistent application of GAAP
c) significantly higher net income than cash flows from operations
d) reliance on share issuances to offset repeated negative cash flow from operations
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
CPA: Audit and Assurance
CPA: Financial Reporting
CPA: Strategy & Governance
Bloomcode: Knowledge
AACSB: Analytic
2. You have just started your new job as a financial analyst at the bank. In your role you are required to assess the financial performance of the bank’s lending clients. In assessing the first set of company statements you identify an unusually high debt to equity ratio. What might this be an indicator of?
a) compromised cash flows from operations
b) extremely high liquidity
c) decreasing returns on shareholder equity
d) increasing risk of bankruptcy
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
3. Which of the following statements about the statement of financial position is NOT correct?
a) It reports the assets, liabilities, and shareholders’ equity of an enterprise for a period of time.
b) It is sometimes referred to as the balance sheet.
c) It provides a basis for calculating rates of return on invested assets.
d) It is useful for analyzing liquidity and solvency.
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. Which of the following is NOT a limitation of the balance sheet?
a) Many items that are of financial value are omitted.
b) Judgements and estimates are used.
c) Current fair value is not reported.
d) It can be used to assess liquidity.
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
5. Which of the following statements regarding the statement of financial position is NOT correct?
a) The SFP is used to assess a company's risk.
b) The SFP can be used to evaluate a company's liquidity.
c) The SFP can be used evaluate a company's financial flexibility.
d) The SFP can be used to determine a company’s free cash flows.
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. The statement of financial position is useful for all the following, EXCEPT to
a) compute rates of return.
b) analyze cash inflows and outflows for the period.
c) evaluate capital structure.
d) assess future cash flows.
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
7. The statement of financial position is useful for analyzing all the following, EXCEPT for
a) liquidity.
b) solvency.
c) profitability.
d) financial flexibility.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. An enterprise’s ability to pay its debts and related interest is called
a) liquidity.
b) financial flexibility.
c) the amount of time expected to pass until an asset is realized.
d) solvency.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
9. An enterprise’s ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities is called
a) financial flexibility.
b) liquidity.
c) the quick ratio.
d) solvency.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
10. Generally, as financial flexibility increases, the risk of enterprise or business failure will
a) increase.
b) decrease.
c) stay the same.
d) be eliminated.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
11. Which of the following is NOT a limitation of the statement of financial position?
a) Many assets are reported at historical cost.
b) Judgements and estimates are used.
c) Only “hard” numbers are reported.
d) Disclosure of all pertinent information in the notes.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
12. Ash Corporation has trouble in meeting the payment terms for its trade payables. Management asks the controller to explain why this might be happening. The controller calculates some key ratios to help understand the problem. Which ratio below is likely the most useful to the controller?
a) debt to equity ratio
b) asset coverage ratio
c) acid test ratio
d) turnover ratio
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
13. Which of the following items may reflect management bias to improve the company’s solvency ratios?
a) overestimating bad debt expense
b) off–balance sheet financing
c) overestimating product returns
d) recognizing cash deposits as unearned revenues
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
14. Monetary assets represent
a) only cash.
b) contractual rights to receive cash.
c) equity investments in other companies.
d) cash or claims to future cash flows that are fixed and determinable in amounts and timing.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
15. Monetary assets include
a) cash, accounts receivable, and inventory.
b) accounts receivable, notes receivable, and inventory.
c) cash, accounts receivable, and notes receivable.
d) accounts receivable and property, plant, and equipment.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
16. Financial instruments do NOT include
a) cash.
b) inventory.
c) derivatives.
d) accounts payable.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
17. Non-monetary assets include
a) accounts receivable, notes receivable and inventory.
b) accounts receivable and property, plant and equipment.
c) inventory, property, plant and equipment, and intangibles.
d) accounts receivable and investments.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
18. Non-monetary assets
a) are those for which the cash value is determinable in amount and timing.
b) are often measured at historical cost.
c) are always classified as non-current.
d) will required future cash outflows from the company.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
19. Which of the following statements below regarding financial instruments is NOT correct?
a) Financial instruments should be offset against one another on the statement of financial position.
b) The fair value option for reporting may be used under IFRS and ASPE.
c) Financial instruments are often marketable or tradeable.
d) Financial instruments may include liabilities.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
20. The basis for classifying assets as current or non-current is conversion to cash within
a) the accounting cycle or one year, whichever is shorter.
b) the accounting cycle or one year, whichever is longer.
c) the operating cycle or one year, whichever is longer.
d) the operating cycle or one year, whichever is shorter.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
21. The operating cycle is the time between
a) selling products to customers and the realization of cash.
b) purchase of inventory and selling to customers.
c) manufacture of products and receiving cash from customers.
d) acquisition of assets for processing and the realization in cash or cash equivalents.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
22. Which of the following is a current asset?
a) trade instalment receivables normally collectible over a period of eighteen months
b) intangible assets
c) investment in associates (significant influence investments)
d) cash designated for the purchase of property, plant, and equipment
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
23. Which of the following should NOT be considered current assets in the statement of financial position?
a) instalment notes receivable due over eighteen months, in accordance with normal trade practice
b) prepaid taxes, which cover assessments for the current year
c) equity or debt securities purchased with cash available for current operations
d) franchises and copyrights
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
24. Equity or debt securities held to finance future construction of additional plants should be classified on a statement of financial position as
a) current assets.
b) property, plant, and equipment.
c) non-current investments.
d) intangible assets.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
25. Which of the following statements about intangible assets is INCORRECT?
a) They are capital assets that have no physical substance.
b) Intangibles with finite lives are amortized but not tested for impairment.
c) Intangibles with indefinite lives are not amortized but are tested for impairment.
d) Internally recognized intangibles are never recognized on the statement of financial position.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
26. Which of the following is NOT a current liability?
a) unearned revenue
b) derivatives
c) stock dividends distributable
d) trade accounts payable
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
27. Working capital is
a) capital which has been reinvested in the business.
b) cash invested by owners.
c) cash and receivables less current liabilities.
d) current assets less current liabilities.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
28. An example of an item which is NOT an element of working capital is
a) accrued interest on notes receivable.
b) goodwill.
c) inventory.
d) short-term investments.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
29. Which of the following statements best describes a liability?
a) Any obligation, whether enforceable or not, is a liability.
b) A liability is an enforceable economic burden or obligation.
c) A liability is a legal economic benefit.
d) Deferred income taxes are always shown as liabilities.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
30. Which of the following should be EXCLUDED from long-term liabilities?
a) derivatives
b) employee future benefits obligations
c) long-term liabilities maturing within the operating cycle, but will be paid from a sinking fund
d) bonds payable maturing in five years
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
31. Which of the following would NOT appear in the equity section of a statement of financial position?
a) preferred shares
b) accumulated other comprehensive income
c) stock dividend distributable
d) investment in associate
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
32. The shareholders' equity section is usually divided into which four parts?
a) preferred shares, common shares, retained earnings, contributed surplus
b) preferred shares, common shares, retained earnings, other comprehensive income
c) capital shares, contributed surplus, retained earnings, accumulated other comprehensive income
d) capital shares, appropriated retained earnings, unappropriated retained earnings, contributed surplus
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
33. The current assets section of the balance sheet should include
a) machinery.
b) patents.
c) goodwill.
d) inventory.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
34. Receivables are valued based on
a) fair value.
b) estimated amount collectible.
c) lower of cost and market value.
d) historical cost.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
35. Scooby Corp.'s trial balance included the following account balances at December 31, 2023:
Accounts receivable (net) $82,000
Trading investments 14,000
Accumulated depreciation–equipment 30,000
Cash 20,000
Inventory 54,000
Equipment 50,000
Patent 8,000
Prepaid expenses 3,000
Land held for future plant site 36,000
In Scooby’s December 31, 2023 statement of financial position, the current assets total is
a) $209,000.
b) $181,000.
c) $173,000.
d) $147,000.
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $82,000 + $14,000 + $20,000 + $54,000 + $3,000 = $173,000
Use the following information for questions 36–38.
Polis Corp.’s trial balance at December 31, 2023 is properly adjusted except for the income tax expense adjustment.
Polis Corp.
Trial Balance
December 31, 2023
Dr. Cr.
Cash $ 337,500
Accounts receivable (net) 1,447,500
Inventory 1,192,500
Property, plant, and equipment (net) 4,183,000
Accounts payable and accrued liabilities $990,500
Income tax payable 342,000
Future tax liability 37,500
Common shares 1,675,000
Contributed surplus 1,340,000
Retained earnings, Jan. 1, 2023 2,325,000
Net sales and other revenues 6,180,000
Costs and expenses 5,040,000
Income tax expenses 689,500 ______________
$12,890,000 $12,890,000
Other financial data for the year ended December 31, 2023:
- Included in accounts receivable is $360,000 due from a customer and payable in quarterly instalments of $45,000. The last payment is due December 29, 2025.
- The balance in the future income tax liability account relates to a temporary difference that arose in a prior year, of which $15,000 is classified as a current liability.
- During the year, estimated tax payments of $330,000 were charged to income tax expense. The current and future tax rate on all types of income is 35 percent.
36. In Polis’ December 31, 2023 statement of financial position, the current assets total is
a) $2,977,500.
b) $2,797,500.
c) $1,530,000.
d) $2,247,500.
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $337,500 + [$1,447,500 – ($45,000 x 4)] + $1,192,500 = $2,797,500
37. In Polis’ December 31, 2023 statement of financial position, the current liabilities total is
a) $1,217,500.
b) $1,347,500.
c) $1,100,000.
d) $1,057,000.
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Note the adjusted income tax expense will be $399,000 [($6,180,000 – $5,040,000) x 35%] = $399,000. When the expense is reduced by $290,500 ($689,500 – $399,000 = $290,500), the liability will also be reduced by the same amount to $51,500 ($990,500 + $51,500) + $15,000 = $1,057,000
38. In Polis’ December 31, 2023 statement of financial position, the final retained earnings balance is
a) $2,775,500.
b) $3,066,000.
c) $2,567,500.
d) $3,008,000.
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,325,000 + $6,180,000 – $5,040,000 – $399,000 (income tax exp) = $3,066,000
39. On January 1, 2023, Neptune Inc. leased a building to Saturn Corp. for a ten-year term at an annual rental of $200,000. At inception of the lease, Neptune received $800,000, which covered the first two years rent of $400,000 and a security deposit of $400,000. This deposit will not be returned to Saturn upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $800,000 should be shown as a current and long-term liability in Neptune’s December 31, 2023 statement of financial position?
Current Liability Long-term Liability
a) $0 $800,000
b) $200,000 $400,000
c) $400,000 $400,000
d) $400,000 $200,000
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
40. Which of the following statements regarding intangible assets is NOT correct?
a) Goodwill is an amortizable asset.
b) Financial analysts often ignore intangible assets.
c) Intangible assets with finite and indefinite lives may be tested for impairment.
d) Intangibles include patents, copyrights, and secret processes.
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
41. Dynasty Furniture sell high end designer furniture. Most of its inventory is sourced from Europe. The company purchases its inventory FOB shipping point and must pay its European suppliers in advance. Once payment is received the inventory is shipped. On average it takes the inventory 8 weeks to arrive. The company’s average inventory turnover is 5 times. Most sales are to corporate clients with an average collection period of 45 days. What is Dynasty’s cash conversion cycle?
a) 45 days
b) 56 days
c) 91 days
d) 174 days
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (365 / 5 = 73 days) + (8 weeks * 7 days) + 45 days = 174 days
42. Which of the following balance sheet classifications would normally require the greatest amount of supplemental disclosure?
a) Current assets
b) Current liabilities
c) Plant assets
d) Long-term liabilities
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Other Required Disclosures
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
43. Which of the following is NOT a required supplemental disclosure for the balance sheet?
a) contingencies
B) financial forecasts
C) accounting policies
D) contractual situations
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Other Required Disclosures
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
44. Which of the following facts concerning depreciable assets should be included in the summary of significant accounting policies?
Depreciation Method Composition
a) No Yes
b) Yes Yes
c) Yes No
d) No No
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Other Required Disclosures
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
45. Which of the following does NOT reflect the type of information that typically requires a supplemental note disclosure?
a) accounting policies
b) comprehensive income
c) contingencies
d) contractual obligations
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Other Required Disclosures
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
46. Which foundational principle in the conceptual framework requires the disclosure of significant commitments due to contractual situations?
a) economic entity
b) full disclosure
c) going concern
d) matching
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Other Required Disclosures
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
47. Which of the following is NOT a method of disclosing additional information in the financial statements?
a) supporting schedules
b) parenthetical explanations
c) cross-reference and contra items
d) press releases
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
48. Which of the following is a contra account?
a) Premium on bonds payable
b) Unearned revenue
c) Patents
d) Accumulated depreciation
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
49. Significant accounting policies may NOT be
a) selected on the basis of judgement.
b) selected from existing acceptable alternatives.
c) unusual or innovative in application.
d) omitted from financial-statement disclosure.
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
50. Investments R Us Limited has a bond premium payable account reflected on its statement of financial position. Which of the following statements is correct?
a) The bond premium payable account is an adjunct account.
b) The bond premium payable may need to be cross referenced with an asset account.
c) The bond premium payable account is a contra account.
d) The bond premium payable account may be clarified through the use of a parenthetical explanation.
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
51. Investments R Us Limited has the following select accounts:
Accounts Receivable $ 850,000
Allowance for Expected Credit Losses 8,500
Bonds Payable 3,000,000
Cash on Deposit with sinking fund for redemption of bonds payable 2,500,000
Premium on Bond Payable 175,000
What is the total bonds payable liability?
a) $3,175,000
b) $3,000,000
c) $500,000
d) $175,000
Difficulty: Medium
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $3,000,000 + $175,000 = $3,175,000
52. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
a) retained earnings statement.
b) income statement.
c) statement of cash flows.
d) statement of financial position.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
53. On a statement of cash flows, the enterprise’s main revenue-producing activities are disclosed in the
a) operating activities.
b) investing activities.
c) financing activities.
d) both operating and investing activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
54. Making and collecting loans and disposing of property, plant, and equipment are
a) operating activities.
b) investing activities.
c) financing activities.
d) liquidity activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
55. In preparing a statement of cash flows, the repurchase of a company’s own shares at an amount greater than cost would be classified as a(n)
a) operating activity.
b) extraordinary activity.
c) financing activity.
d) investing activity.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
56. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a) sale of equipment at fair value
b) sale of merchandise on credit
c) declaration of a cash dividend
d) issuance of bonds payable at a discount
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
57. The statement of cash flows reports all of the following, EXCEPT
a) the net change in cash for the period.
b) the cash effects of operations during the period.
c) the free cash flows generated during the period.
d) investing transactions.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
58. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
a) operating activities.
b) investing activities.
c) financing activities.
d) lending activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
59. In a statement of cash flows, receipts from the sale of property, plant, and equipment and other productive assets should be classified as cash inflows from
a) operating activities.
b) financing activities.
c) investing activities.
d) selling activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
60. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
a) operating activities.
b) borrowing activities.
c) lending activities.
d) financing activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
61. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
a) lending activities.
b) operating activities.
c) investing activities.
d) financing activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
62. In a statement of cash flows, the redemption of debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
a) operating activities.
b) investing activities.
c) financing activities.
d) lending activities.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
63. On December 31, 2023 Bomber Corp. is preparing its year-end cash flow statement. The following activities occurred during the last 12 months:
- Sold equipment for $15,500 that originally cost $25,000
- Purchased land and a building for $1,500,000
- Issued $2,500,000 in bonds
- Sold $50,000 in common shares
- Declared $10,000 in dividends to be paid in January
- Net income for the period was $150,000
What was the total net cash of the investing activities for the period?
a) $1,625,000 cash inflow
b) $1,484,500 cash outflow
c) $1,475,000 cash inflow
d) $1,475,000 cash outflow
Difficulty: Medium
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,500,000 – $15,500 = $1,484,500 cash outflow
64. On December 31, 2023 Rider Corp. is preparing its year-end cash flow statement. The following activities occurred during the last 12 months:
- Sold equipment for $15,500 that originally cost $25,000
- Purchased land and a building for $1,500,000
- Issued $2,500,000 in bonds
- Repaid $75,000 on the mortgage payable
- Sold $50,000 in Common shares
- Declared $10,000 in dividends to be paid in January
What was the total net cash of the financing activities for the period?
a) $2,465,000 cash inflow
b) $2,475,500 cash outflow
c) $2,475,000 cash inflow
d) $2,465,000 cash outflow
Difficulty: Medium
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,500,000 – $75,000 + $50,000 = $2,475,000 cash inflow
65. A statement of cash flows prepared under the INDIRECT method adds and subtracts certain items to the base number. Decreases in unearned revenues would be shown as
a) a deduction from net income.
b) an addition to net income.
c) a deduction from sales.
d) an addition to sales.
Difficulty: Easy
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
66. In preparing a statement of cash flows under the INDIRECT method, cash flows from operating activities
a) are always equal to accrual accounting income.
b) are calculated as the difference between revenues and expenses.
c) can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
d) can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.
Difficulty: Easy
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
67. Preparing a statement of cash flows under the INDIRECT method involves all of the following, EXCEPT determining the
a) cash provided by operations.
b) cash provided by or used in investing and financing activities.
c) change in cash during the period.
d) cash collections from customers during the period.
Difficulty: Easy
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
68. A statement of cash flows prepared under the DIRECT method starts with
a) net income.
b) gross profit.
c) cash received from customers.
d) income from operations.
Difficulty: Easy
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
69. Which of the following is NOT included in a statement of cash flows prepared under the DIRECT method?
a) cash flows from operating activities
b) gross profit
c) cash paid to suppliers and employees
d) interest paid or received
Difficulty: Easy
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
70. SingSong Corporation reports the following information:
Net income $720,000
Depreciation expense 210,000
Increase in accounts receivable 90,000
SingSong should report cash provided by operating activities of
a) $420,000.
b) $600,000.
c) $840,000.
d) $1,020,000.
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $720,000 + $210,000 – $90,000 = $840,000.
71. Willows Corporation reports the following information:
Net income $320,000
Depreciation expense 70,000
Increase in accounts receivable 30,000
What amount should Willows report under the cash provided (used) by operating activities portion of its statement of cash flows?
a) $280,000
b) $420,000
c) $220,000
d) $360,000
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $320,000 + $70,000 – $30,000 = $360,000
72. Caldwell Corporation reports:
Cash provided by operating activities $280,000
Cash used by investing activities 110,000
Cash provided by financing activities 140,000
Ending cash balance 380,000
What is Caldwell’s beginning cash balance?
a) $70,000
b) $130,000
c) $380,000
d) $410,000
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $380,000 – $140,000 + $110,000 – $280,000 = $70,000
73. Markle Corporation reports the following:
Cash provided by operating activities $70,000
Cash provided by financing activities 35,000
Beginning cash balance 17,500
Net change in cash 77,500
What is Markle’s cash provided/(used) by investing activities?
a) $10,000 used
b) $27,500 used
c) $10,000 provided
d) $27,500 provided
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $77,500 – $70,000 – $35,000 = $(27,500)
74. Stampeders Inc. has the following comparative statement of financial position information at December 31:
2023 2022
Accounts Receivable $85,750 $75,500
Inventory 42,500 49,750
Prepaid Expenses 8,750 9,000
Accounts Payable 33,400 35,000
Income Tax Payable 9,100 9,000
The company’s net income for the period was $102,000. Using the indirect method, calculate the cash provided/(used) by operating activities.
a) $106,250
b) $103,250
c) $100,750
d) $97,750
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $102,000 – ($85,750 - $75,500) + ($49,750 - $42,500) + ($9,000 – $8,750) – ($35,000 - $33,400) + ($9,100 – $9,000) = $97,750
75. Lion’s Limited has the following comparative statement of financial position information at December 31:
2023 2022
Accounts Receivable $85,750 $75,500
Inventory 42,500 49,750
Prepaid Expenses 8,750 9,000
Accounts Payable 33,400 35,000
Income Tax Payable 9,100 9,000
The company’s net income for the period is $101,000 and depreciation expense is $12,600. What are the net cash inflows / outflows related to the change in current assets from one period to the next?
a) $2,750 outflow
b) $2,750 inflow
c) $2,500 inflow
d) $4,250 outflow
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($85,750 – $75,500) – ($49,750 – $42,500) + ($9,000 – $8,750) = $2,750 outflow
76. The cash debt coverage ratio is calculated by dividing net cash provided by operating activities by
a) average long-term liabilities.
b) average total liabilities.
c) ending long-term liabilities.
d) ending total liabilities.
Difficulty: Easy
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
77. The current cash debt coverage ratio is often used to assess
a) financial flexibility.
b) solvency.
c) liquidity.
d) profitability.
Difficulty: Easy
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
78. A measure of a company’s financial flexibility is the
a) cash debt coverage ratio.
b) current cash debt coverage ratio.
c) free cash flow.
d) cash debt coverage ratio and free cash flow.
Difficulty: Easy
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
79. Free cash flow is calculated as net cash provided by operating activities less
a) capital expenditures.
b) dividends.
c) capital expenditures and dividends.
d) capital expenditures and depreciation.
Difficulty: Easy
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
80. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?
a) Financial flexibility refers to how closely the cash position aligns with the asset and liability accounts.
b) Financial flexibility refers to the firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c) Financial flexibility refers to the firm's ability to pay its debts as they mature.
d) Financial flexibility refers to the firm's ability to invest in a number of projects with different objectives and costs.
Difficulty: Easy
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Finance
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Use the following information for questions 81–83.
The following select information for Alloutte Inc. has been provided for the year ended December 31, 2023:
Net Cash provided from Operating Activities $332,650
Investing Activities:
Sale of Long-term investments 75,700
Purchase of PPE (157,500)
Net Cash Used by Investing Activities (81,800)
Financing Activities:
Repayment of Loan Payable ( 25,250)
Issue of Common Shares 62,750
Payment of dividends (18,250)
Net Cash Provided by Financing Activities 19,250
2023 2022
Current Assets $ 675,000 $ 663,000
Non-Current Assets (net) 1,253,000 1,110,000
Current Liabilities 487,500 452,000
Non-Current Liabilities 765,700 700,450
81. What is Alloutte’s Current Cash Debt Coverage Ratio in 2023?
a) 0.28
b) 0.45
c) 0.68
d) 0.71
Difficulty: Medium
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $332,650 / ($487,500 + $452,000)/2 = 0.71
82. What is Alloutte’s Cash Debt Coverage Ratio in 2023?
a) 0.28
b) 0.45
c) 0.68
d) 0.71
Difficulty: Medium
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $332,650 / (($487,500 + $765,700) + ($452,000 + $700,450)) /2 = 0.28
83. What is Alloutte’s Free Cash Flow?
a) $314,400
b) $232,600
c) $175,150
d) $156,900
Difficulty: Medium
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $332,650 – $157,500 – $18,250 = $156,900
84. A company that follows ASPE
a) must not disclose cash flow per share.
b) may disclose cash flow per share.
c) may disclose cash flow per share if it makes a special election to do so.
d) must disclose cash flow per share.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
85. A company that follows IFRS
a) may disclose cash flow per share if it makes a special election to do so.
b) must not disclose cash flow per share.
c) is generally allowed to disclose cash flow per share.
d) only discloses cash flow per share if there are more than two shareholders.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
86. When current debt is refinanced by the issue date of financial statements, it may generally be presented as non-current
a) if the company follows IFRS.
b) under either ASPE or IFRS.
c) if the company follows ASPE.
d) only if the company is a subsidiary.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
87. Which of the following items would require special disclosure under IFRS?
a) investment property only
b) biological assets and investment property only
c) provisions and biological assets
d) biological assets, investment property, and provisions
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
88. Some companies following IFRS list current assets in
a) alphabetical order.
b) the reverse order of liquidity.
c) the ascending order of their balances.
d) the descending order of their balances.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
89. Which of the following statements about IFRS and ASPE accounting and reporting requirements for the statement of financial position is NOT correct?
a) The presentation formats required by IFRS and ASPE for the statement of financial position are similar.
b) One difference between the reporting requirements under IFRS and those of ASPE is that an IFRS balance sheet may list long-term assets first.
c) Both IFRS and ASPE require that cash flow per share information be reported on the statement of financial position.
d) Both IFRS and ASPE require that comparative information be reported.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
90. Significant changes to the presentation of financial statements (Primary Financial Statements Project) are currently being developed by the IASB. Which of the following best describes the focus of the changes?
a) The changes focus on more effectively highlighting the company's assets, liabilities, and equity.
b) The changes focus on segregating the company’s operating, financing, and investing activities.
c) The changes focus on highlighting the company's major business and financing activities and improving the way information is communicated in the financial statements.
d) The focus is on increasing the number of notes to be attached to financial statements.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
91. In December 2019 the IASB issued its “General Presentation and Disclosures” Exposure Draft. The exposure draft changes to individual statements were generally limited with a greater focus on which of the following?
a) The statement of financial position
b) The statement of cash flows
c) The statement of shareholders’ equity
d) The statement of financial performance
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*92. Ratios that measure how effectively an entity is using is assets are called
a) liquidity ratios.
b) activity ratios.
c) solvency ratios.
d) profitability ratios.
Difficulty: Easy
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*93. Ratios that measure the degree of protection for long-term creditors and investors or the ability to meet long-term obligations are called
a) liquidity ratios.
b) activity ratios.
c) solvency ratios.
d) profitability ratios.
Difficulty: Easy
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*94. Net sales divided by average total assets is called
a) inventory turnover.
b) receivables turnover.
c) rate of return on assets.
d) asset turnover.
Difficulty: Easy
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Use the following information for questions *95–*96.
Maggins Inc. provides the following information:
Net sales $880,000
Cost of goods sold 550,000
Current assets 525,000
Current liabilities 262,500
Total assets, 2022 975,000
Total assets, 2023………………………………………………………….. 925,000
Non-Current liabilities 377,500
Net income 165,000
*95. Calculate the asset turnover ratio of Maggins Inc.
a) 0.56
b) 0.17
c) 0.93
d) 1.08
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $880,000 ÷ ($925,000 + $975,000)/2 = 0.93
*96. Calculate the debt to total assets ratio for Maggins Inc.
a) 69.2%
b) 65.6%
c) 44.1%
c) 42.7%
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($262,500 + $377,500) ÷ $925,000 = 69.2%
Use the following information for questions *97–*98.
Charlie’s Inc. gives you the following information pertaining to the year 2023:
Net sales $925,000
Cost of goods sold 575,000
Current assets 525,000
Current liabilities 275,000
Average total assets 1,000,000
Total liabilities 560,000
Net income 225,000
*97. Calculate the rate of return on assets for Charlie’s Inc.
a) 92.5%
b) 42.9%
c) 4.44%
d) 22.5%
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $225,000 ÷ $1,000,000 = 22.5%
*98. Calculate the gross profit margin for Charlie’s Inc.
a) 62.2%
b) 37.9%
c) 24.3%
d) 13.5%
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($925,000 - $575,000) ÷ $925,000 = 37.9%
*99. Financial or capital market risks are related to
a) financing activities only.
b) investing activities only.
c) both financing and investing activities.
d) operating and financing activities.
Difficulty: Easy
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Exercises
Ex. 5-100 Earnings quality
An analysis of the financial statements of Scion Inc. shows that net income is significantly higher than cash flows from operations. What does this indicate about the quality of Scion’s earnings? Where else can analysts look for further information?
Solution 5-100
A net income significantly higher than cash flows from operations could be a sign of poor earnings quality that may require further analysis. Analysts should look to the financing activities section to see if Scion is relying on the issuance of shares or other financing activities to generate cash flow. They could also look towards industry reports and analyst expectations to see if Scion’s cash flow and earnings quality are expected to improve.
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
CPA: Communication
CPA: Finance
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-101 Creditworthiness; debt to total assets
Explain why a high debt to total assets ratio means a company has a higher risk of bankruptcy.
Solution 5-101
The debt to total assets ratio is a coverage ratio that measures the percentage of total assets provided by creditors. Coverage ratios are an indicator of the degree of protection extended to long-term creditors and investors. A company whose assets are heavily financed by creditors (also known as heavily leveraged) is liable to pay those creditors back first in the event the company is forced to liquidate. Where leveraged assets represent most of a company’s value, it is likely that there would be little or nothing left after repaying these creditors, and that the company would declare bankruptcy before repaying investors or other equity providers.
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Communication
CPA: Finance
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-102 Liquidity, solvency, and financial flexibility
Explain the relation between the concepts of liquidity, solvency, and financial flexibility.
Solution 5-102
Liquidity reflects the amount of time that is required to convert current assets into cash and pay current liabilities. Solvency reflects an enterprise’s ability to pay its debts and related interest.
Together, liquidity and solvency affect an entity’s financial flexibility, a measure of the company’s ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. For example, if a company’s cash sources to finance expansion or pay off maturing debt are limited, it will have difficulty surviving bad times, recovering from unexpected setbacks, and taking advantage of investment opportunities.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-103 Limitations of the statement of financial position
The statement of financial position has several limitations. One of these limitations is that the statement necessarily leaves out many items. Of greatest concern to investors are omitted liabilities. Explain why some liabilities are left off the statement of financial position, and how investors can identify and measure potentially omitted items.
Solution 5-103
Assets or liabilities may be left off the statement of financial position because they cannot be recorded objectively. To preserve the quality of the liquidity and solvency ratios (which measure the enterprise’s short-term ability to pay maturing obligations) a company may be particularly biased against including liabilities in the financial statements.
When reviewing a company, an analyst’s knowledge of the business and industry can make it possible to identify and measure off-balance sheet items that often represent additional risk to the company. For example, manufacturers or utility companies may have capital lease obligations, which have not been capitalized. Analysts can search for corresponding note disclosures and industry statistics to estimate and incorporate these lease obligations into the liquidity and solvency ratios.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-104 IFRS Practice Statement 2
IFRS Practice Statement 2 (PS2) was issued in September 2017 and provides (non-mandatory) guidance for reporting entities to consider. Given that information is material if its omission or misstatement could influence financial information users’ decisions, identify the four-step process for assessing materiality suggested by PS2.
Solution 5-104
PS2 suggests a four-step process for assessing materiality when preparing financial statements, including:
(a) Identifying information that is potentially material;
(b) Assessing whether the identified information is material;
(c) Organizing the information to communicate it clearly and concisely to key users;
(d) Reviewing the draft financial statements to determine if all material information has been properly identified and materiality considered based on the complete set of financial statements.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. 5-105 Terminology
In the space provided at the right, write the word or phrase that is defined or indicated.
1. A company's ability to take effective ______
actions to alter the amounts and timing
of cash flows so it can respond to
unexpected needs and opportunities
2. Claims to future cash flows that are ______
fixed or determinable in amount and timing
3. Short-term, highly liquid investments ______
that are readily convertible into known
amounts of cash
4. Assets that are held for sale in the ______
ordinary course of business
5. Expenditures already made for benefits ______
that will be received within one year
or the operating cycle
6. Assets of physical substance that are ______
used in ongoing business operations
7. Assets that have no physical substance ______
8. The excess of total current assets over ______
total current liabilities
9. Unrealized gains and losses included ______
as part of equity
Solution 5-105
1. Financial flexibility
2. Monetary assets
3. Cash equivalents
4. Inventories
5. Prepaid expenses
6. Property, plant, and equipment
7. Intangible assets
8. Working capital
9. Accumulated other comprehensive income
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 5-106 Definitions
Provide clear, concise answers for the following:
1. Explain the merits of classified financial statements.
2. What are financial instruments?
3. What are inventories?
4. What are other assets?
5. What statement of financial position information requires supplemental disclosure?
6. Explain the purpose of the statement of cash flows.
7. Explain the concept of free cash flow.
Solution 5-106
1. Classification of financial statements increases the information content. This is accomplished through the grouping of items with similar characteristics and separating items with different characteristics.
2. Financial instruments are contracts between two or more parties that create financial assets for one party and a financial liability or equity instrument for the other and include cash, the right to receive cash or another financial instrument, and investments in other companies.
3. Inventories are assets that are held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of service.
4. “Other assets” includes assets that are not included anywhere else. They commonly include items such as non-current receivables and assets in special funds and require the disclosure of sufficient detail.
5. Supplemental disclosure is required for contingencies, accounting policies, contractual situations, and subsequent events. Additional information is also required for many individual statement of financial position items.
6. The purpose of the statement of cash flows is to allow users to assess an entity's capacity to generate cash and cash equivalents and its needs for cash resources. The statement identifies the sources of cash inflows and uses of cash during the period.
7. Free cash flow can be defined as a measure of a company's level of financial flexibility and is calculated as cash flow from operating activities minus capital expenditures and dividends.
Difficulty: Easy
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Information Requiring Supplemental Disclosure
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-107 Account classification
Although the statement of financial position can be classified and presented in several ways, the major subdivisions noted in Illustration 5.1 tend to be closely followed. Explain how following these classifications contributes to the financial statement objectives of representational faithfulness and transparency.
Solution 5-107
Standard classifications make it easier to calculate important ratios, such as the current ratio for assessing liquidity and debt to equity ratios for assessing solvency. Breaking down assets and liabilities into categories helps users calculate which assets are more significant than others and how these relationships change over time. This gives insight into management’s strategy and stewardship. If classifications were uncommon across companies and years this type of intra- and inter-company analysis would not be possible, and some adjustment would be necessary to bring statements to a comparable and transparent format. Keeping the same format enhances transparency. Where there is a change in presentation to preserve representational faithfulness, the company should disclose any supplementary information, including, but not limited to, comparative data for prior years, to facilitate analysis and enhance the understanding of financial statement users.
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-108 Account classification
ASSETS LIABILITIES AND CAPITAL
a) Current assets f) Current liabilities
b) Investments g) Long-term liabilities
c) Property, plant, and equipment h) Preferred shares
d) Intangibles i) Common shares
e) Other assets j) Contributed surplus
k) Retained earnings
l) Items excluded from statement of financial
position
Using the letters above, compete the chart below by classifying the following accounts according to the preferred statement of financial position presentation.
1. Bond sinking fund
2. Common stock dividend distributable
3. Appropriation for plant expansion
4. Bank overdraft
5. Bonds payable (due 2029)
6. Premium on common shares
7. Securities owned by another company which are collateral for that company's note
8. Trading securities
9. Inventory
10. Unamortized discount on bonds payable (due 2029)
11. Patents
12. Unearned revenue
Solution 5-108
1. b
2. k
3. k
4. f
5. g
6. j
7. l
8. b
9. a
10. g
11. d
12. f
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-109 Valuation of statement of financial position items
Complete the chart below. Use the code letters listed below a) – k) to indicate, for each statement of financial position item (1 – 13) listed below, what the usual valuation reported on the statement of financial position would be.
a) No par value
b) Current cost of replacement
c) Amount payable when due, less unamortized discount or plus unamortized premium
d) Amount payable when due
e) Fair value at statement of financial position date
f) Net realizable value
g) Lower of cost and net realizable value
h) Original cost less accumulated depreciation/amortization
i) Original cost less accumulated depletion
j) Historical cost
k) Unexpired or unconsumed cost
1. Common shares 8. Long-term bonds payable
2. Prepaid expenses 9. Land (in use)
3. Mineral resources 10. Land (future plant site)
4. Property, plant, and equipment 11. Patents
5. Accounts receivable 12. Trading investments
6. Copyrights 13. Accounts payable
7. Merchandise inventory
Solution 5-109
1. a
2. k
3. i
4. h
5. f
6. h
7. g
8. c
9. j
10. j
11. h
12. e
13. d
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-110 Statement of financial position classifications
Typical statement of financial position (SFP) classifications are as follows:
a) Current Assets g) Long-Term Liabilities
b) Investments h) Share Capital
c) Plant Assets i) Contributed Surplus
d) Intangible Assets j) Retained Earnings
e) Other Assets k) Notes to Financial Statements
f) Current Liabilities l) Not Reported on SFP
Complete the chart below. Indicate by use of the above letters how each of the following items would be classified on a statement of financial position prepared at December 31, 2023. If a contra account, or any amount that is negative or opposite the normal balance, place parentheses around the letter selected. A letter may be used more than once or not at all.
_____ 1. Accrued salaries and wages
_____ 2. Rental revenues for three months collected in advance
_____ 3. Land used as plant site
_____ 4. Equity securities classified as short term
_____ 5. Cash
_____ 6. Accrued interest payable due in thirty days
_____ 7. Premium on preferred shares issued
_____ 8. Dividends in arrears on preferred shares
_____ 9. Petty cash fund
_____ 10. Unamortized discount on bonds payable due in 2029
_____ 11. Common shares at no par value
_____ 12. Bond indenture covenants
_____ 13. Unamortized premium on bonds payable due in 2026
_____ 14. Allowance for expected credit losses
_____ 15. Accumulated depletion, oil well
_____ 16. Natural resources—timberlands
_____ 17. Deficit (no income earned since beginning of company)
_____ 18. Goodwill
_____ 19. Ninety-day notes payable
_____ 20. Investment in bonds in another company; that will be held to 2024 maturity
_____ 21. Land held for speculation
_____ 22. Death of company president
_____ 23. Current maturity of bonds payable
_____ 24. Investment in subsidiary; no plans to sell in the near future
_____ 25. Trade accounts payable
_____ 26. Preferred shares, no par value
_____ 27. Prepaid expenses for next twelve months
_____ 28. Copyright
_____ 29. Accumulated depreciation, equipment
_____ 30. Earnings, not distributed to shareholders
Solution 5-110
1. f 16. c
2. f 17. j
3. c 18. e
4. a 19. f
5. a 20. b
6. f 21. b
7. i 22. l
8. k 23. f
9. a 24. b
10. g 25. f
11. h 26. h
12. k 27. a
13. g 28. d
14. a 29. c
15. c 30. j
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-111 Statement of financial position classifications
The various classifications listed below have been used in the past by Mercury Ltd. in its statement of financial position. The corporation asks your professional opinion concerning the appropriate classification of each of the items 1–14. Complete the chart below.
a) Current Assets f) Current Liabilities
b) Investments g) Long-Term Liabilities
c) Property, Plant and Equipment h) Share Capital
d) Intangible Assets i) Retained Earnings
e) Other Assets
Indicate by letter how each of the following items should be classified. If an item need not be reported on the statement of financial position, use the letter "X." A letter may be used more than once or not at all. If an item can be classified in more than one category, choose the category most favoured by the authors of your textbook.
1. Employees' payroll deductions
2. Cash in sinking fund
3. Rent revenue collected in advance
4. Factory building retired from use and held for sale
5. Patents
6. Payroll cash fund
7. Goods held on consignment
8. Accrued revenue on short-term investments
9. Advances to salespersons
10. Premium on bonds payable due two years from date
11. Bank overdraft
12. Salaries which company budget shows will be paid to employees within the next year
13. Work in process
14. Appropriation of retained earnings for bond indebtedness
Solution 5-111
1. f
2. b
3. f
4. a or e
5. d
6. a
7. x
8. a
9. a
10. g
11. f
12. x
13. a
14. i
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-112 Statement of financial position classifications
The various classifications listed below have been used in the past by Droid Inc. in its statement of financial position.
a) Current Assets e) Current Liabilities
b) Investments f) Long-term Liabilities
c) Plant and Equipment g) Common Shares
d) Intangible Assets h) Retained Earnings
Instructions
Complete the chart below. Indicate by letter how each of the items below should be classified at December 31, 2023. If an item is not reported on the December 31, 2023 statement of financial position, use the letter "X" for your answer. If the item is a contra account within the classification, place parentheses around the letter. A letter may be used more than once or not at all.
a__ Allowance for expected credit losses
1. Customers' accounts with credit balances
2. Bond sinking fund
3. Salaries which the company's cash budget shows will be paid to employees in 2024
4. Accumulated depreciation
5. Appropriation of retained earnings for plant expansion
6. Impairment of goodwill for 2023
7. On December 31, 2023, Droid signed a purchase commitment to buy all of its raw materials from Jupiter Inc. for the next two years
8. Discount on bonds payable due March 31, 2026
9. Launching of Droid’s internet retailing division in February, 2023
10. Cash dividends declared on December 15, 2023, payable on January 15, 2024
Solution 5-112
1. e
2. b
3. x
4. c
5. h
6. x
7. x
8. f
9. x
10. e
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-113 Statement of financial position
The following statement of financial position was prepared by the bookkeeper for Hauser Company as of December 31, 2023:
Hauser Company
Statement of Financial Position
as of December 31, 2023
Cash $ 95,000 Accounts payable $ 85,000
Accounts receivable (net) 52,200 Bonds payable 100,000
Inventory 62,000 Shareholders' equity
Investments 76,300 Common Shares 100,000
Equipment (net) 106,000 Retained Earnings 138,500
Patents 32,000 ___________
$423,500 $423,500
The following additional information is provided:
1. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank overdraft of $2,500 has been deducted.
2. The net accounts receivable balance includes:
(a) accounts receivable—debit balances $60,000;
(b) accounts receivable—credit balances $4,000;
(c) allowance for expected credit losses $3,800.
3. Inventory does not include goods costing $3,000 shipped out on consignment. Receivables of $3,000 were recorded on these goods.
4. Investments include investments in common shares, trading $19,000 and available-for-sale $48,300, and franchises $9,000.
5. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is $40,000.
Instructions
Prepare a statement of financial position in good form (shareholders' equity details can be omitted.) Assume Hauser reports in accordance with ASPE.
Solution 5-113
Hauser Company
Statement of Financial Position
As of December 31, 2023
Assets
Current assets
Cash $ 88,100 (1)
Trading investments 19,000
Accounts receivable $57,000 (2)
Less: Allowance for expected credit losses 3,800 53,200
Inventory 65,000 (3)
*Equipment held for sale 1,000 (4)
Total current assets 226,300
Investments
Available-for-sale securities 48,300
Cash surrender value 9,400 57,700
Property, plant, and equipment
Equipment 145,000 (5)
Less: accumulated depreciation-equipment 40,000 105,000
Intangible assets
Patents 32,000
Franchises 9,000 41,000
Total assets $430,000
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 85,000
Bank overdraft 2,500
Unearned revenue 4,000 (6)
Total current liabilities 91,500
Long-term liabilities
Bonds payable 100,000
Total liabilities 191,500
Shareholders' equity
Common Shares 100,000
Retained Earnings 138,500
Total liabilities and shareholders' equity $430,000
(1) ($95,000 – $9,400 + $2,500)
(2) ($60,000 – $3,000)
(3) ($62,000 + $3,000)
(4) ($5,000 – $4,000)
(5) ($106,000 + $40,000 – $5,000 + $4,000)
(6) Credit balances in accounts receivable
*An alternative is to show it as another asset.
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-114 Statement of financial position presentation
Given the following account information for the first year of Howard Corporation, prepare a balance sheet in report form for the company as at December 31, 2023. All accounts have normal balances.
Equipment $60,000
Interest Expense 2,400
Interest Payable 600
Retained Earnings ?
Dividends 50,400
Land 137,320
Accounts Receivable 102,000
Bonds Payable 78,000
Notes Payable (due in 6 months) 29,400
Common Shares 70,000
Accumulated Depreciation–Equipment 10,000
Prepaid Expenses 5,000
Service Revenue 341,400
Buildings 80,400
Supplies 1,860
Income Tax Payable 3,000
Utilities Expense 1,320
Advertising Expense 1,560
Salaries and Wages Expense 53,040
Salaries and Wages Payable 900
Accumulated Depreciation–Building 15,000
Cash 45,000
Depreciation Expense 8,000
Solution 5-114
Howard Corporation
Balance Sheet
December 31, 2023
Assets
Current assets
Cash $ 45,000
Accounts receivable 102,000
Supplies 1,860
Prepaid expenses 5,000
Total current assets $153,860
Property, plant, and equipment
Land 137,320
Buildings $ 80,400
Accumulated depreciation—buildings (15,000) 65,400
Equipment 60,000
Accumulated depreciation—equipment (10,000) 50,000 252,720
Total assets $406,580
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $29,400
Income tax payable 3,000
Salaries and wages payable 900
Interest payable 600
Total current liabilities $ 33,900
Long-term liabilities
Bonds payable 78,000
Total liabilities 111,900
Shareholders’ Equity
Common shares 70,000
Retained earnings ($275,080*— $50,400) 224,680
Total shareholders' equity 294,680
Total liabilities and shareholders' equity $406,580
* $341,400 – $53,040 – $8,000 – $2,400 – $1,560 – $1,320 = $275,080
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-115 Subsequent events
Explain the importance of considering subsequent events before financial statements are issued. What two types of subsequent events should be considered prior to financial statement issuance?
Solution 5-115
It is generally several weeks or months after the year end before the financial statements are issued. This time is to count inventory, reconcile subsidiary ledgers with controlling accounts, prepare necessary adjusting entries, ensure all transactions have been entered and obtain an audit. It’s possible that, in this period, important transactions and events may occur that materially affect the company’s financial position. These events are known as subsequent events, and fall into two categories:
- Events that provide further evidence of conditions that existed at the date of the Statement of Financial Position
- Events that indicate conditions that occurred after the financial statement date
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Audit and Assurance
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-116 Contractual disclosures and ethical consideration
Contractual obligations should be disclosed in the notes to financial statements when they are significant. Considerable judgement is needed to determine whether leaving out such information is misleading. What principle should the accountant’s judgment consider in this situation? Describe anything that should be factored into the disclosure decision.
Solution 5-116
The basis for including additional information is the full disclosure principle; that is, the information needs to be important enough to influence the decisions of an informed user. When in doubt, it is better to disclose a little too much information than not enough. However, the accountant’s judgement should also include ethical considerations, because the way of disclosing accounting principles, methods, and other items that have important effects on the enterprise may reflect the interests of a particular stakeholder in subtle ways that are at the expense of other stakeholders. For example, a reader might benefit from comprehensive note disclosures that potentially jeopardize the company’s competitive advantage or its position with regard to a legal matter.
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental disclosure.
Section Reference: Information Requiring Supplemental Disclosure
CPA: Communication
CPA: Financial Reporting
CPA: Professional and Ethical Behaviour
Bloomcode: Comprehension
AACSB: Ethics
Ex. 5-117 Notes
Describe the purpose and appropriate use of notes to the financial statements. How should notes be presented, and what information should they provide? Name an area of the financial statements for which notes are frequently used.
Solution 5-117
Notes are used if additional explanations cannot be shown conveniently as parenthetical explanations or to reduce the amount of detail on the face of the statement. The notes should present all essential facts as completely and concisely as possible. Loose wording can mislead readers instead of helping them. Notes should add to the total information made available in the financial statements, while not raising unanswered questions or contradicting other parts of the statements.
An area of the financial statements often accompanied by notes is the property, plant, and equipment portion.
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Audit and Assurance
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-118 Disclosure Techniques
Disclosure techniques in the preparation of the financial statements includes the use of cross referencing, and contra and adjunct accounts. Discuss how each of these techniques can be used and provide examples of each in your explanation.
Solution 5-118
Relationships between assets and liabilities can be cross referenced on the statement of financial position. For example, a company with a sinking fund that is setting aside funds to redeem a bond payable (the liability) might deposit cash (the asset) with a trust company for future redemption of the bond issue. These two accounts would be cross referenced to one another on the statement.
Another common procedure is to establish contra or adjunct accounts. These are described and used as follow:
Contra Account—Is an SFP item that reduces an asset, liability, or owners’ equity account. Examples include Accumulated Depreciation and Allowance for Expected Credit Losses.
Adjunct Account—Is an SFP item that increases an asset, liability, or owners’ equity account. An example is Premium on Bonds Payable.
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-119 Statement of cash flows
Complete the chart below, for each event listed. Select the appropriate category, which describes the effect on a statement of cash flows:
a) Cash provided/used by operating activities
b) Cash provided/used by investing activities
c) Cash provided/used by financing activities
d) Not a cash flow
1. Payment on long-term debt
2. Issuance of bonds at a premium
3. Collection of accounts receivable
4. Cash dividends declared
5. Issuance of shares to acquire land
6. Sale of marketable securities (long-term)
7. Payment of employees' wages
8. Issuance of common shares for cash
9. Payment of income taxes payable
10. Purchase of equipment
11. Purchase of treasury stock (common)
12. Sale of real estate held as a long-term investment
Solution 5-119
1. c
2. c
3. a
4. d
5. d
6. b
7. a
8. c
9. a
10. b
11. c
12. b
Difficulty: Medium
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-120 Statement of cash flows purpose and use
Illustrate the basic format of the cash flow statement. What three important questions does the cash flow statement help answer? What types of cash flow patterns would a potential lender be looking for in the cash flow statement? Provide an assessment of what a favourable pattern would entail.
Solution 5-120
The basic format of the cash flow statement is as follows:
Statement of Cash Flows
Cash flows from operating activities $xxx
Cash flows from investing activities xxx
Cash flows from financing activities xxx
Net increase (decrease) in cash xxx
Cash at beginning of year xxx
Cash at end of year $xxx
The statement of cash flows helps answer the following simple but important questions:
- Where did cash come from during the period?
- What was cash used for during the period?
- What was the change in the cash balance during the period?
A lender is concerned with a company’s ability to repay any outstanding loans. As a result, the lender is particularly concerned with whether or not cash is being provided or used by each of the cash flow activities, not just an overall positive cash increase. A lender will be looking for a positive cash flow from operating activities. This would be an indicator that cash is being generated from operating activities - the company is likely pricing properly to cover its costs and is properly managing its inventory and receivables. Similarly, a positive cash flow from financing activities is also positive – the company is likely borrowing or selling shares to expand and grow operations. However, a negative cash flow related to investing activities could be problematic. This might be an indicator that the company is selling its long-term assets. This might be an indicator of financial difficulty. The company could be downsizing or restructuring. The sale of long-term assets could sacrifice future revenues and profitability. This would compromise a company’s ability to repay its debt obligations.
Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 5-121 Cash flows from operating activities – indirect method
Carla Limited had the following financial statements:
Carla Limited
Income Statement
For the Year Ended December 31, 2023
Net sales $165,000
Cost of goods sold 97,500
Gross profit 67,500
Operating expenses 27,500
Income from operations 40,000
Interest expense 3,500
Income before income taxes 36,500
Income taxes 11,000
Net income $ 25,500
Carla Limited.
Comparative Statement of Financial Position
As at December 31
2023 2022
Cash $15,000 $ 9,750
Accounts receivable 11,750 8,750
Inventory 16,500 11,750
Prepaid insurance 2,500 2,000
Equipment 25,500 33,500
Accumulated depreciation—equipment (16,250) (17,750)
Total assets $55,000 $48,000
Accounts payable $ 5,000 $ 6,750
Salaries and wages payable 2,000 2,000
Income tax payable 3,000 1,000
Bank loans 0 8,750
Common shares 15,000 15,000
Retained earnings 30,000 14,500
Total liabilities and shareholders’ equity $55,000 $48,000
Additional information:
- Equipment that cost $8,000 was sold for the carrying amount of $3,750.
- Dividends declared and paid were $10,000.
Instructions
Prepare the operating activities section of a statement of cash flows using the indirect method.
Solution 5-121
Carla Limited
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Operating activities
Net income $25,500
Depreciation* 2,750
Increase in accounts receivable (3,000)
Increase in inventory (4,750)
Increase in prepaid insurance (500)
Decrease in accounts payable (1,750)
Increase in income tax payable 2,000
Cash from operating activities $20,250
* Calculation for depreciation:
$8,000 – $3,750 = $4,250 accumulated depreciation on sold asset
$4,250 + $16,250 = $20,500 accumulated depreciation before asset disposal
$20,500 – $17,750 = $2,750 depreciation expense
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-122 Cash flows from operating activities – indirect method
Titiki Ltd. had the following comparative statement of financial position:
Titiki Ltd.
Comparative Statement of Financial Position
As at December 31
2023 2022
Cash $ 20,500 $ 12,500
Accounts receivable 34,000 25,500
Inventory 20,000 30,000
Prepaid insurance 2,500 2,000
Equipment 102,000 90,000
Accumulated depreciation–equipment (22,500) (12,500)
Total assets $156,500 $147,500
Accounts payable $ 23,000 $ 20,000
Salaries and wages payable 4,000 2,000
Interest payable 2,000 3,000
Income tax payable 4,000 5,000
Bank loans 30,000 34,500
Common shares 65,000 65,000
Retained earnings 28,500 18,000
Total liabilities and shareholders’ equity $156,500 $147,500
Additional information:
- Net income for the fiscal year was $13,500.
- Equipment that cost $10,000 was sold for a gain of $1,000 during 2023. The equipment’s accumulated depreciation was $7,000.
Instructions
Prepare the operating activities section of a statement of cash flows using the indirect method.
Solution 5-122
Titiki Ltd.
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Operating activities
Net income $13,500
Depreciation 17,000
Gain on sale of equipment (1,000)
Increase in accounts receivable (8,500)
Decrease in inventory 10,000
Increase in prepaid insurance (500)
Increase in accounts payable 3,000
Increase in salaries and wages payable 2,000
Decrease in interest payable (1,000)
Decrease in income tax payable (1,000)
Cash from operating activities $33,500
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-123 Cash flows from operating activities – direct method
Carla Limited had the following financial statements:
Carla Limited
Income Statement
For the Year Ended December 31, 2023
Net sales $165,000
Cost of goods sold 97,500
Gross profit 67,500
Operating expenses 27,500
Income from operations 40,000
Interest expense 3,500
Income before income taxes 36,500
Income taxes 11,000
Net income $ 25,500
Carla Limited
Comparative Statement of Financial Position
As at December 31
2023 2022
Cash $15,000 $ 9,750
Accounts receivable 11,750 8,750
Inventory 16,500 11,750
Prepaid insurance 2,500 2,000
Equipment 25,500 33,500
Accumulated depreciation–equipment (16,250) (17,750)
Total assets $55,000 $48,000
Accounts payable $ 5,000 $ 6,750
Salaries and wages payable 2,000 2,000
Income tax payable 3,000 1,000
Bank loans 0 8,750
Common shares 15,000 15,000
Retained earnings 30,000 14,500
Total liabilities and shareholders’ equity $55,000 $48,000
Additional information:
- Equipment that cost $8,000 was sold for the carrying amount of $3,750.
- Dividends declared and paid were $10,000.
Instructions
Prepare the operating activities section of a statement of cash flows using the direct method.
Solution 5-123
Carla Limited
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Cash received from customers $162,000
Cash paid to suppliers $104,000
Cash paid for operating expenses 25,250
Cash paid for interest 3,500
Cash paid for income taxes 9,000 $141,750
Net cash provided by operating activities $ 20,250
Calculations:
Cash received from customers:
Net sales $165,000
– Increase in accounts receivable (3,000)
$162,000
Cash paid to suppliers:
Cost of goods sold $ 97,500
+ Increase in inventory 4,750
+ Decrease in accounts payable 1,750
$104,000
Cash paid for operating expenses:
Operating expenses $27,500
+ Increase in prepaid insurance 500
- Depreciation expense (2,750)
$25,250
Cash paid for interest:
Interest expense $3,500
Cash paid for income tax:
Income tax expense $11,000
– Increase in income tax payable 2,000
$ 9,000
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-124 Statement of cash flows ratios
Financial statements for Comet Ltd. are presented below:
Comet Ltd.
Statement of Financial Position
December 31, 2023
Assets Liabilities and Shareholders’ Equity
Cash $ 44,000 Accounts payable $28,000
Accounts receivable 39,000 Bonds payable 54,000
Equipment 154,000
Accumulated depreciation–
equipment (46,000) Common shares 69,000
Patents 24,000 Retained earnings 64,000
$215,000 $215,000
Comet Ltd.
Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Net income $60,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable $(19,000)
Increase in accounts payable 7,000
Depreciation–buildings and equipment 12,000
Gain on sale of equipment (7,000)
Amortization of patents 3,000 (4,000)
Net cash provided by operating activities 56,000
Cash flows from investing activities
Sale of equipment 14,000
Purchase of land (27,000)
Purchase of buildings and equipment (52,000)
Net cash used by investing activities (65,000)
Cash flows from financing activities
Payment of cash dividend (25,000)
Sale of bonds 45,000
Net cash provided by financing activities 20,000
Net increase in cash 11,000
Cash, January 1, 2023 33,000
Cash, December 31, 2023 $44,000
At the beginning of 2023, the accounts payable balance was $21,000, and the bonds payable balance was $9,000. All of Comet’s bonds have been issued at par.
Instructions
Calculate the following for Comet Ltd.:
a) Current cash debt coverage ratio
b) Cash debt coverage ratio
c) Free cash flow
Solution 5-124
a) Current cash debt coverage ratio = Net cash provided by operating activities
Average current liabilities
= $56,000
($21,000 + $28,000) ÷ 2
= $56,000 = 2.29:1
$24,500
b) Cash debt coverage ratio = Net cash provided by operating activities
Average total liabilities
= $56,000 _________
($30,000 + $82,000) ÷ 2
$56,000 = 1:1
$56,000
c) Free cash flow = Net cash provided by operating activities –
capital expenditures and dividends
= $56,000 – *$79,000 – $25,000 = $(48,000)
* $27,000 + $52,000
Difficulty: Medium
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 5-125 Calculation of free cash flow and ratio
Dawe Corporation reports the following information:
Net cash provided by operating activities $285,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends declared 60,000
Capital expenditures 110,000
Payments of debt 35,000
Instructions
Calculate the following:
a) Cash Debt Coverage Ratio
b) Free Cash Flow
Solution 5-125
a) $285,000 ÷ ($150,000 + $100,000) = 1.14:1
b) $285,000 – $60,000 – $110,000 = $115,000
Difficulty: Medium
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 5-126 Calculation of ratios
Keefe Enterprises reported the following:
Net sales $285,000
Average trade receivables 150,000
Cost of goods sold 100,000
Average inventory 60,000
Average total assets 110,000
Average current liabilities 35,000
Instructions
Calculate the activity ratios of Keefe Enterprises.
*Solution 5-126
a) Receivables turnover: Net sales / Average trade receivables = $285,000 / $150,000 = 1.9:1
b) Inventory turnover: Cost of goods sold / Average inventory = $100,000 / $60,000 = 1.67:1
c) Asset turnover: Net sales / Average total assets = $285,000 / $110,000 = 2.59:1
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 5-127 Interpretation of ratios
For each ratio you calculated for Keefe Enterprises in exercise 5-126 explain what the ratio measures and provide a brief interpretation of the ratio you calculated for Keefe Enterprises.
*Solution 5-127
a) Receivables turnover: Liquidity of receivables. Keefe’s receivables are fairly liquid and turns 1.9 times per period. This indicates a healthy rate of collection, though we’d need to look more closely at the customer terms to know this for certain.
b) Inventory turnover: Liquidity of inventory. Keefe’s inventory is also fairly liquid and is turning over 1.67 times per period.
c) Asset turnover: How efficiently assets are used to generate sales. Keefe appears to make efficient use of its assets, generating sales at over two times the assets’ value.
Difficulty: Hard
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Finance
CPA: Financial Reporting
Bloomcode: Evaluation
AACSB: Analytic
*Ex. 5-128 Calculation of ratios
A company reported current assets of $120,000 and current liabilities of $150,000.
Instructions
Calculate the following:
a) Working capital
b) Current ratio
c) Provide an assessment of the company’s liquidity position based on these results.
*Solution 5-128
(a) Working capital: $120,000 – $150,000 = $30,000 negative
(b) Current ratio: $120,000 / $150,000 = 0.80:1
(c) The company has significant liquidity issues. There is currently only $0.80 in current assets for every $1 in current debt. This should be investigated further. Depending on the composition of the current assets, the company may be actually further compromised if the bulk of the current assets is inventory. Current Liabilities should also be examined. Is the company structured properly? Is it possible that a portion of the debt that is classified as current may actually be long term? If so, then that debt should be reclassified as long term. Using a credit line to purchase a long-term asset could contribute to this type of issue.
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 5-129 Calculation of ratios
A company reported current assets of $450,000, current liabilities of $250,000, and total assets of $1 million.
Instructions
Calculate the following:
a) Working capital
b) Current ratio
c) What is your assessment of this company’s liquidity position? How is the company performing compare to the industry average for the current ratio of 2.0 for other companies within this industry?
*Solution 5-129
(a) Working capital: $450,000 – $250,000 = $200,000
(b) Current ratio: $450,000 / $250,000 = 1.8:1
(c) While this company appears to have a strong liquidity position as reflected by the current ratio of 1.8:1, indicating there is $1.80 in current assets for every $1 in current liabilities, it is still performing below other company’s in the same industry. Therefore, further investigation is warranted. The company should assess the individual components of current assets. For example, the company should be asking itself the following types of questions:
- How quickly is the company collecting its receivables?
- Are these good quality receivables?
- How quickly is the inventory turning?
- Is any of the inventory no longer saleable?
- Does the inventory value reflect is LCNRV?
Based on the answers to these types of questions, the current ratio by itself may have limited value.
Difficulty: Medium
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
PROBLEMS
Pr. 5-130 Statement of financial position format
The following statement of financial position has been submitted to you by an inexperienced bookkeeper. List your suggestions for improvements in the format of the statement of financial position. Consider both terminology deficiencies as well as classification inaccuracies.
Hathaway Industries Inc.
Statement of Financial Position
For the Period Ended December 31, 2023
Assets
Fixed Assets–Tangible
Equipment $110,000
Less: reserve for depreciation (40,000) $70,000
Factory supplies 22,000
Land and buildings 400,000
Less: reserve for depreciation (150,000) 250,000
Plant site held for future use 90,000 $ 432,000
Current Assets
Accounts receivable 175,000
Cash 80,000
Inventory 220,000
Treasury stock (at cost) 20,000 495,000
Fixed Assets–Intangible
Goodwill 80,000
Notes receivable 40,000
Patents 26,000 146,000
Deferred Charges
Advances to salespersons 60,000
Prepaid rent 27,000
Returnable containers 75,000 162,000
TOTAL ASSETS $1,235,000
Liabilities
Current Liabilities
Accounts payable $140,000
Allowance for expected credit losses 8,000
Common stock dividend distributable 35,000
Income Tax payable 42,000
Sales taxes payable 17,000 $ 242,000
Long-Term Liabilities, 5% debenture bonds, due 2026 500,000
Reserve for contingencies 150,000 650,000
TOTAL LIABILITIES 892,000
Equity
Common shares, no par value, issued 12,000 shares with
60 shares held as treasury stock $240,000
Dividends paid (20,000)
Earned surplus 23,000
Other accumulated past earnings 100,000
TOTAL EQUITY 343,000
TOTAL LIABILITIES AND EQUITY $1,235,000
Note 1. The reserve for contingencies has been created by charges to earned surplus and has been established to provide a provision for future uncertainties.
Note 2. The inventory account balance includes only items physically present at the main plant and warehouse. Items located at the company's branch sales office, amounting to $30,000, are excluded since the company has consistently followed this procedure for many years.
Solution 5-130
1. The heading should be at a specific date rather than for a period of time.
2. “Fixed Assets – Tangible” and “Reserve for Depreciation” is poor terminology; should be Property, Plant and Equipment and Accumulated Depreciation.
3. Land and buildings should be segregated into two accounts. The Accumulated Depreciation account should only be reported for the buildings.
4. Plant site held for future use should be shown in the Investments section.
5. Popular practice lists current assets first; as well, current assets are usually listed in order of liquidity. Factory supplies should be shown as a current asset.
6. Treasury stock is not an asset, but a deduction from shareholders’ equity.
7. Notes receivable should be reported as a current asset or an investment.
8. The deferred charge items should be reclassified as follows:
Advances to salespersons—current asset
Prepaid rent—current asset
Returnable containers—current asset
9. Allowance for expected credit losses should be shown as a contra account to accounts receivable.
10. Common stock dividend distributable should be shown in shareholders’ equity.
11. The debenture bonds should be shown on a separate line below the heading Long-Term Liabilities.
12. Earned surplus is poor terminology. The term "retained earnings" is more appropriate.
13. Other Accumulated Past Earnings is poor terminology. Accumulated Other Comprehensive Income is the term required by IFRS.
14. “Dividends paid” title is a misnomer. It probably is a “dividends declared” item that should be closed to retained earnings.
15. No reference in the body of the statement is made to the notes. The order of the notes is wrong.
16. Note 2 indicates that the inventory account is understated by $30,000. Inventory and earned surplus amounts should both be adjusted by increasing them by $30,000.
17. Specific identification and description of all significant accounting principles and methods that involve selection from among alternatives and/or those that are peculiar to a given industry should be disclosed in the annual report.
18. Goodwill should be listed as an asset by itself. It is not an intangible asset.
Difficulty: Medium
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 5-131 Statement of financial position presentation
The following statement of financial position was prepared by the bookkeeper for Badger Corp. at December 31, 2023.
Badger Corp.
Statement of Financial Position
December 31, 2023
Cash $ 90,000 Accounts payable $ 75,000
Accounts receivable (net) 52,200 Bank loans 110,000
Inventory 57,000 Shareholders’ equity
Investments 76,300 Common shares………………….. 50,000
Equipment (net) 86,000 Retained earnings……………….. 158,500
Patents 32,000 ___________
$393,500 $393,500
The following additional information is provided:
1. “Cash” includes prepaid insurance of $9,400; as well, a bank overdraft of $1,500 has been deducted.
2. The net accounts receivable balance includes:
(a) accounts receivable—debit balances $62,000;
(b) accounts receivable—credit balances $5,000;
(c) allowance for expected credit losses $4,800.
3. Inventory does not include goods costing $5,000 shipped out on consignment. Receivables of $5,000 were recorded on these goods.
4. Investments include investments in common shares, trading investments $24,000 and long-term investments $43,300, and franchises $9,000.
5. Equipment costing $8,000 with accumulated depreciation $6,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is $40,000.
Instructions
Prepare a statement of financial position in good form.
Solution 5-131
Badger Corp.
Statement of Financial Position
December 31, 2023
Assets
Current assets
Cash $ 82,100 (1)
Trading investments 24,000
Accounts receivable $57,000 (2)
Less: allowance for expected credit losses 4,800 52,200
Inventory 62,000 (3)
Prepaid insurance 9,400
*Equipment held for sale 2,000 (4)
Total current assets 231,700
Investments
Investments 43,300
Property, plant, and equipment
Equipment 124,000 (5)
Less: accumulated depreciation 40,000 84,000
Intangible assets
Patents 32,000
Franchises 9,000 41,000
Total assets $400,000
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $80,000 (6)
Bank overdraft 1,500
Total current liabilities 81,500
Long-term liabilities
Bank loans 110,000
Total liabilities 191,500
Shareholders’ equity
Common shares………………………………………………… 50,000
Retained earnings……………………………………………….. 158,500
Total shareholders’ equity 208,500
Total liabilities and shareholders’ equity $400,000
(1) ($90,000 – $9,400 + $1,500)
(2) ($62,000 – $5,000)
(3) ($57,000 + $5,000)
(4) ($8,000 – $6,000)
(5) ($86,000 + $40,000 – $8,000 + $6,000)
(6) ($75,000 + $5,000)
* An alternative is to show this as an “other asset.”
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 5-132 Calculation of ending retained earnings
The records of Biloxi Corp. for calendar 2023 reflected the following correct pre-tax amounts: gain from discontinued operations, $50,000; cash dividends declared and paid, $45,000; retained earnings, January 1, 2023, $275,000, correction of accounting error, $35,000 debit; income before income taxes and before discontinued operations, $165,000. The average income tax rate of 40% applies to all items except the dividends.
Instructions
Calculate the December 31, 2023 ending balance of retained earnings.
Solution 5-132
Beginning balance................................... $275,000
Correction of error ($35,000 x 60%)................. (21,000)
Income ($165,000 x 60%)............................. 99,000
Gain from discontinued operations ($50,000 x 60%)................... 30,000
Dividends........................................... (45,000)
Ending balance.................................... $338,000
Difficulty: Medium
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 5-133 Partial Statement of cash flows – direct method
Shoprite Ltd. reported the following net income on its statement of income for the month ended June 30, 2023:
SHOPRITE LTD.
Statement of Income
Month Ended June 30, 2023
Sales revenue $35,700
Cost of goods sold 12,500
Gross profit 23,200
Operating expenses
Salaries expense $5,200
Administrative expenses 890
Depreciation expense 1,200 7,290
Income from operations 15,910
Interest expense 545
Income before income tax 15,365
Income tax expense 3,025
Net income $12,340
During the month, Shoprite’s accounts receivable increased by $1,350 and accounts payable increased by $245. The company also received payments for deferred revenue of $250. Inventory decreased by $1,345. Administrative costs reported on the statement of income do not include prepaid expenses of $450. Income taxes payable increased in total by $3,025. The company has no other liabilities related to other operating expenses.
Instructions
Prepare the operating activities section of Shoprite’s statement of cash flows using the direct method.
Solution 5-133
SHOPRITE LTD.
Statement of Cash Flows (partial)
Month Ended June 30, 2023
Operating activities
Cash receipts from customers $34,600
Cash payments
To suppliers $10,910
For operating expenses 6,540
For interest 545
17,995
Net cash provided by operating activities $16,605
Calculations:
Cash receipts from customers = $35,700 – $1,350 + 250 = $34,600
Cash payments to suppliers = $12,500 – $1,345 – $245 = $10,910
Cash payments for operating expenses = $5,200 + $890 + 450 = $6,450
Cash payments for interest = $545
Cash payments for income tax = $3,025 – $3,025 = 0
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods.
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 5-134 Statement of cash flows – direct method
The controller of Nebula Corporation has provided you with the following information:
Nebula Corporation
Income Statement
For the Year Ended December 31, 2023
Net sales $620,000
Operating expenses 410,000
Income from operations 210,000
Other revenues and expenses
Gain on sale of equipment 30,000
Interest expense 8,000 22,000
Income before income taxes 232,000
Income taxes 92,800
Net income $139,200
Nebula Corporation
Comparative Account Information
Relating to Operations
For the Year Ended December 31, 2023
2023 2022
Accounts receivable $56,000 $40,000
Prepaid insurance 5,000 6,000
Accounts payable 59,000 47,000
Interest payable 600 1,500
Income tax payable 4,200 6,000
Unearned revenue 20,000 14,000
Instructions
Prepare a statement of cash flows (for operating activities only) for the year ended December 31, 2023, using the direct method.
Solution 5-134
Nebula Corporation
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Cash received from customers $610,000
Cash paid
For operating expenses $397,000
For interest 8,900
For income taxes 94,600 $500,500
Net cash provided by operating activities $109,500
Calculations:
Cash received from customers:
Net sales $620,000
– Increase in accounts receivable (16,000)
+ Increase in unearned revenue 6,000
$610,000
Cash paid for operating expenses:
Operating expenses $410,000
– Decrease in prepaid insurance (1,000)
– Increase in accounts payable (12,000)
$397,000
Cash paid for interest:
Interest expense $8,000
+ Decrease in interest payable 900
$8,900
Cash paid for income tax:
Income tax expense $92,800
+ Decrease in income tax payable 1,800
$94,600
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods.
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
CPA: Taxation
Bloomcode: Application
AACSB: Analytic
Pr. 5-135 Statement of cash Flows – indirect method
Prepare a statement of cash flows (for operating activities only) for the year ended December 31, 2023 using the indirect method.
Solution 5-135
Nebula Corporation
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Net income $139,200
Adjustments:
Gain on sale of equipment (30,000)
Increase in accounts receivable (16,000)
Decrease in prepaid insurance 1,000
Increase in accounts payable 12,000
Decrease in interest payable (900)
Decrease in income tax payable (1,800)
Increase in unearned revenue 6,000
Net cash provided by operating activities $109,500
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 5-136 Statement of cash flows – indirect method
Titiki Ltd. had the following comparative statement of financial position:
Titiki Ltd.
Comparative Statement of Financial Position
As at December 31
2023 2022
Cash $ 20,500 $ 12,500
Accounts receivable 34,000 25,500
Inventory 20,000 30,000
Prepaid insurance 2,500 2,000
Equipment 102,000 90,000
Accumulated depreciation–equipment (22,500) (12,500)
Total assets $156,500 $147,500
Accounts payable $ 23,000 $ 20,000
Salaries and wages payable 4,000 2,000
Interest payable 2,000 3,000
Income tax payable 4,000 5,000
Bank loans 30,000 34,500
Common shares 65,000 65,000
Retained earnings 28,500 18,000
Total liabilities and shareholders’ equity $156,500 $147,500
Additional information:
- Net income for the fiscal year was $13,500.
- Equipment that cost $10,000 was sold for a gain of $1,000 during 2023. The equipment’s accumulated depreciation was $7,000.
Instructions
Prepare the statement of cash flows using the indirect format.
Solution 5-136
Titiki Ltd.
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Operating activities
Net income $13,500
Depreciation 17,000
Gain on sale of equipment (1,000)
Increase in accounts receivable (8,500)
Decrease in inventory 10,000
Increase in prepaid insurance (500)
Increase in accounts payable 3,000
Increase in salaries and wages payable 2,000
Decrease in interest payable (1,000)
Decrease in income tax payable (1,000)
Cash from operating activities 33,500
Investing activities
Proceeds from sale of equipment $ 4,000
Purchase of equipment (22,000)
Net cash used by investing activities (18,000)
Financing activities
Cash dividends ($18,000 + $13,500 – $28,500) (3,000)
Repayment of bank loans (4,500)
Net cash used by financing activities (7,500)
Net increase in cash 8,000
Cash at beginning of year 12,500
Cash at end of year $20,500
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 5-137 Statement of cash flows – direct method
Carla Limited had the following financial statements:
Carla Limited
Income Statement
For the Year Ended December 31, 2023
Net sales $165,000
Cost of goods sold 97,500
Gross profit 67,500
Operating expenses 27,500
Income from operations 40,000
Interest expense 3,500
Income before income taxes 36,500
Income taxes 11,000
Net income $ 25,500
Carla Limited.
Comparative Statement of Financial Position
As at December 31
2023 2022
Cash $15,000 $ 9,750
Accounts receivable 11,750 8,750
Inventory 16,500 11,750
Prepaid insurance 2,500 2,000
Equipment 25,500 33,500
Accumulated depreciation–equipment (16,250) (17,750)
Total assets $55,000 $48,000
Accounts payable $5,000 $6,750
Salaries and wages payable 2,000 2,000
Income tax payable 3,000 1,000
Bank loans 0 8,750
Common shares 15,000 15,000
Retained earnings 30,000 14,500
Total liabilities and shareholders’ equity $55,000 $48,000
Additional information:
- Equipment that cost $8,000 was sold for its carrying amount of $3,750.
- Dividends declared and paid were $10,000.
Instructions
Prepare the statement of cash flows using the direct method.
Solution 5-137
Carla Limited
Statement of Cash Flows
For the Year Ended December 31, 2023
Operating activities
Cash received from customers $162,000
Cash paid to suppliers $104,000
Cash paid for operating expenses 25,250
Cash paid for interest 3,500
Cash paid for income taxes 9,000 141,750
Net cash provided by operating activities 20,250
Investing activities
Sale of equipment 3,750
Net cash provided by investing activities 3,750
Financing activities
Redemption of bank loans (8,750)
Payment of cash dividends (10,000)
Net cash used by financing activities (18,750)
Net increase in cash 5,250
Cash, January 1 9,750
Cash, December 31 $ 15,000
Calculations:
Cash received from customers:
Net sales $165,000
– Increase in accounts receivable (3,000)
$162,000
Cash paid to suppliers:
Cost of goods sold $ 97,500
+ Increase in inventories 4,750
+ Decrease in accounts payable 1,750
$104,000
Cash paid for operating expenses:
Operating expenses $27,500
+ Increase in prepaid insurance 500
– Depreciation expense (2,750)
$25,250
Cash paid for interest:
Interest expense $3,500
Cash paid for income tax:
Income tax expense $11,000
– Increase in income tax payable (2,000)
$ 9,000
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr.5-138 Statement of cash flow – indirect method
Hemingway Corporation prepared the following statement of cash flows for 2023:
Hemingway Corporation
Statement of Cash Flows
Year Ended December 31, 2023
Operating activities
Net income $78,000
Depreciation expense $ 8,500
Loss on disposal of equipment (1,245)
Increase in accounts receivable (4,500)
Decrease in inventory 1,785
Increase in accounts payable (780)
Increase in income tax payable (7,450) (3,690)
Net cash provided by operating activities 74,310
Investing activities
Purchase of equipment (57,840)
Proceeds from disposal of equipment 6,750
Net cash used by investing activities (51,090)
Financing activities
Repayment of mortgage payable (34,580)
Payment of cash dividend 6,575
Net cash used by financing activities (28,005)
Net decrease in cash (4,785)
Cash, January 1 4,250
Cash, December 31 $ (535)
As a business analyst for Hemingway Corporation, you have been asked to review the statement of cash flows for any errors and make corrections. It appears there are several errors on the statement.
Instructions:
(a) Prepare the corrected statement of cash flows
(b) Calculate the free cash flow
(c) Provide a brief analysis of Hemingway’s operations based on its cash inflows and outflows from its operating, investing and financing activities. What is Hemingway’s’ overall cash position year-over-year?
Solution 5-138
(a)
Hemingway Corporation
Statement of Cash Flows
Year Ended December 31, 2023
Operating activities
Net income $78,000
Depreciation expense $8,500
Loss on disposal of equipment 1,245
Increase in accounts receivable (4,500)
Decrease in inventory 1,785
Increase in accounts payable 780
Increase in income tax payable 7,450 15,260
Net cash provided by operating activities 93,260
Investing activities
Purchase of equipment (57,840)
Proceeds from disposal of equipment 6,750
Net cash used by investing activities (51,090)
Financing activities
Repayment of mortgage payable (34,580)
Payment of cash dividend (6,575)
Net cash used by financing activities (41,155)
Net increase in cash 1,015
Cash, January 1 4,250
Cash, December 31 $ 5,265
(b) The free cash flow should be $35,595. Calculated as $93,260 – $51,090 – $6,575.
(c) Hemingway is likely in the maturity phase of its business life cycle since it is experiencing positive cash flows from operations and are paying dividends. Overall, the cash flows have increased for the year.
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
*Pr. 5-139 Calculation of ratios
Brandon Systems Inc. has provided you with the following information:
2023 2022
Cash $ 21,000 $ 47,000
Trading investments 28,000 —
Accounts receivable 102,000 116,000
Inventory 86,000 64,000
Prepaid expenses 11,000 9,000
Total assets 1,503,000 1,489,000
Total current liabilities 205,000 241,000
Net credit sales 877,000 850,000
Cost of goods sold 570,000 555,000
Operating income 165,000 158,000
Income tax expense 20,000 18,000
Net income 109,000 100,000
Interest expense 36,000 40,000
Common shares (no preferred) 420,000 420,000
Retained earnings 153,000 74,000
Instructions
Calculate the following ratios for 2023 (round to two decimals and show all calculations):
a) Profit margin on sales
b) Quick (acid-test) ratio
c) Receivables turnover
d) Debt to total assets
e) Times interest earned
f) Rate of return on assets
g) Rate of return on common share equity
*Solution 5-139
a) Profit margin on sales = Net income/net sales x 100
= $109,000 x 100 = 12.43%
$877,000
b) Quick (acid-test) ratio = Quick assets/current liabilities
= $21,000 + $28,000 + $102,000 =.74 to 1
$205,000
c) Receivables turnover = Net sales/average A/R
= _ $877,000 _ = 8.05 times
($102,000 + $116,000)/2
d) Debt to total assets = Total liabilities/total assets x 100
= $930,000 x 100 = 61.88%
$1,503,000
Total liabilities = $1,503,000 – $420,000 – $153,000 = $930,000
e) Times interest earned = Net income before interest and income taxes/interest exp
= $109,000 + $36,000 + $20,000 (i.e., operating income) = 4.58 (times)
$36,000
f) Rate of return on assets = Net income/average total assets
= $109,000 x 100 = 7.29%
$1,496,000
Average total assets = ($1,503,000 + $1,489,000)/2 = $1,496,000
g) Rate of return on common share equity = NI/average common S/H equity x 100
= $109,000 x 100 = 20.43%
$533,500
Average equity = ($420,000 + $420,000 + $153,000 + $74,000)/2 = $533,500
Difficulty: Medium
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
CPA: Financial Reporting
CPA: Taxation
Bloomcode: Application
AACSB: Analytic
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Intermediate Accounting v1 13e | Canada | Test Bank
By Donald E. Kieso